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It’s no secret that equity markets have seen their share of market volatility and price declines over the past few weeks, but upheaval in the oil markets have been more severe by comparison. The articles and data that I’ve seen lately are nothing less than incredible, regarding the magnitude of recent oil price moves. Here are a few highlights that I have found of interest.
The first graph demonstrates how the cash price of crude oil, once inflation adjusted is the lowest it’s been since at least 1986.
Over eight trading days in March, oil lost 50% of its value. Keep in mind, that crude oil closed on January 2 at $61.18 per barrel, 65% higher than March 27’s close.
This chart also demonstrates the severity of oil’s daily price movements over the past few weeks. March 18 high to low range was $27.60 – $20.52: so, $7.08 wide translating into a 25.7% high to low change. The next day new circuit breakers were implemented by the CME Group, as indicated on their March 19, 2020 notice:
CME Group increased the Dynamic Circuit Breaker Levels as noted below, effective immediately:
- WTI Crude Oil Futures (CL) from 7% to 15%
- E-mini Crude Oil Futures (QM) from 7% to 15%
- Brent Last Day Financial Futures (BZ) from 7% to 15%.
Next, what I see as one of the most significant items in terms of spread trading, is the steepness of contango in futures prices month to month. When prices are higher in the future (due to storage, insurance, transportation, etc…), the term structure of price curves upward to the right. Currently, the curve is extremely steep, particularly in comparison to a month ago. The drop in demand from the Coronavirus and the increase in supply from Saudi Arabia have turned prices into complete upheaval.
A month ago, in late February, the price difference between the May to December WTI Futures contracts was $0.05 cents. Today it is $12.72, meaning a discount of nearly $13 if willing to take delivery now compared to the end of the year. This type of price differential wreaks havoc for calendar spread traders that had existing positions, and could create an opportunity for new trades if expecting reversion to the mean.
The below graph demonstrates the history of the Brent futures curve, showing that the current contango environment is equivalent to the 2008-2009 environment.
Key Takeaway Points to Consider:
- Oil demand is down.
- Saudi Arabia is increasing supplies.
- Refineries and pipelines can only process so much oil.
- Offshore storage is incredibly expensive, yet tankers are being leased for longer terms.
- Onshore storage is also filling up.
- Rig counts have declined to 624, a decline from 677 at the end of December 2019.
- S. oil production numbers have not shown much of a decrease yet.
The current hard-to-believe price and volatility moves will be forever ingrained in charts for future generations to study. To them it will just be a data point with a few words to define this period. For those of us watching and/or participating in the markets real-time, it is anything but a blip on the screen. It is an incredible display of fear and greed. Time will calm prices. However, the length of time is the unknown. Meanwhile, the options are to try and invest in the market the best you can with the available information or stay on the sidelines until something that resembles a normal environment returns.
